Whilst the figures being quoted for the impact that the PPF
will have to absorb from Carillion’s collapse vary, they are all substantial. The Economist predict that the total
impact could be close
to £900 million, whilst other outlets predict between £587
and £800 million. According to the PPF’s last annual report, the Fund is
operating with a reserve
of just over £6 billion which means that whilst the Carillion hit will
certainly not critically damage the Fund – meaning that headlines like ‘will
pensions still be paid’ are slightly misleading – a minimum impact of £587
million is not insignificant, as the chances of clawing back some income from
the Carillion rubble seem to be more remote by the day; the PPF was
particularly reluctant to engage with the salvaging efforts of Carillion (its
suggestion of transferring debt into shares would have made
the PPF a major shareholder in the firm) which is looking to be a particularly
astute call. However, whilst it is positive news that Carillion’s pension
holders have this safety net to rely on, the situation raises another, more
systemic question.

When a company fails, one of the biggest issues for its
management is the pension pot – the reason for this, in one particular sense at
least, is that the backlash will be amplified if the pension pot is drained in
addition to the funds of the company, because shareholders are categorised, in
the general public’s perceived persona at least, to be accepting of the risk of
loss whereas pension holders are considered to be innocent victims in the
arrangement; this was clearly demonstrated in the overly-public rebuking of Sir
Philip Green’s treatment of the BHS Pension Pot. Yet, if we were to flip the
focus, what does the PPF mean to corporate management? Whilst it means safety
to pension holders, it means another layer of safety net with which directors
can take greater risks for short-term rewards; today it was stated in the media
that ‘the Government has
ordered a fast-track investigation into directors at the failed construction
firm Carillion’ but the chances of that culminating in anything more than a
sacrificial lamb being offered up are extremely remote (the Government’s
own complicity will no doubt be left out of that investigation). So, we
know that an extra layer of protection will likely result in increased
negligence from corporate management (Carillion being the case in point), and
we have discussed on many occasions that the only real antidote is to alter the
perception of what ‘crime’ is so that corporate crime is punished just like ‘conventional’
crime – the chances of risk taking would be instantly reduced. Nevertheless, it
is difficult not be conflicted when assessing the PPF, because it is
extraordinarily important as pension holders, who are often disproportionately incentivised
to contribute to corporate schemes by way of corporate
and governmental inducements, should not face having to lose everything
because of corporate negligence. Yet, the extra layer of protection adds to
other layers which make it extremely easy, particularly when paired to a lax
punitive system for corporate crime, to commit corporate transgressions – now the
moral dilemma of destroying pensions has been, effectively, removed in most
scenarios (there are not many pension schemes which could deplete the PPF’s
reserves single-handedly). The cyclical notion of that understanding results in
the realisation that until corporate crime is properly designated as crime, very little will change.

Thursday, 11 January 2018

In November we discussed the impending crisis at Carillion,
the large-scale construction business that has become intertwined with the U.K.’s
economic future, by way of projects like HS2 – the large scale infrastructure
project that is designed to herald a new era for the different parts of the
U.K. by linking them together by high-speed rail networks. In this post, we
will get an update on proceedings in this particular case because, as
predicted, the situation is worsening by the day and the realisation that
Carillion could collapse moves closer and closer as each stage of the
rescue-process fails. Whilst the same points will be repeated i.e. the danger
of such a collapse for an intertwined company, a new emphasis will be placed
upon a potential ‘bail-out culture’ that may emerge as the U.K. heads into
unchartered and particularly choppy waters post-Brexit.

Ultimately, the firm appears to be close to approaching the
dreaded ‘point of no return’, and if it does collapse the impact will be
massive for a number of distinct reasons. Firstly, the firm employs nearly
20,000 people and its pension deficit would have to be, mostly, absorbed by the
national fisc, which would be particularly bad timing given the financial
no-mans-land the country is seemingly heading to with regards to Brexit. Secondly,
for a company to fail that is so intertwined within the country’s infrastructural
future would present an incredible situation whereby projects that have been
designed with Carillion’s capacity in mind will have to be taken up by other
companies. However, perhaps the most crucial impact will be on that aspect that
is touted, almost daily, as being the lifeblood of the business world –
confidence. For Carillion to collapse, so close to the Country’s secession from
the European Union, could have massive consequences for the economic and
political landscape in this country. It is for these reasons that the analysts
who have suggested that the company is actually too-big-to-fail will likely end
up being proved correct; the intricacies of TBTF is that one is not considered
in this category by way of their market capitalisation or anything financial,
so to speak, but by how much they are intertwined with the country’s health –
Carillion certainly fits that bill. The financial blow would be manageable, but
allowing Carillion to fail will send ripples through the business community
that may very well turn into waves at a rapid rate – the Government’s hands
are, presumably, tied in this regard but, as always, it is the public who will
pay the price. As the NHS
buckles under the increasing pressure exerted on it in this austerity-driven
era, it is likely that money will be diverted to protecting private
business; quite the microcosm for the current political climate.

Tuesday, 9 January 2018

Here in Financial
Regulation Matters we have looked at the issue of personal debt before,
with posts ranging from the ever-growing
crisis to the predatory
lending that exists within the sector. In today’s post, we will be looking
at the figures that have been released by a blog for Bank of England (BoE)
staff – it is not a usual blog, but a vehicle for BoE staff to openly discuss
certain policies and aspects that affect policies – that describe how the
situation for everyday consumers is a cyclical, almost hopeless process that
many stay trapped in for decades. This analysis will be counteracted by the
news stories that receive plenty of attention in the media, with the aim being
to illustrate how consumer confidence is almost enshrined within the modus
operandi of the system, even in the
face of opposing, and often devastating facts.

The news has been awash recently with stories about
consumers operating more
shrewdly in the credit markets (in relation to switching between better
arrangements with credit cards etc.), or that the amount of credit
consumption actually dropped in December which, according to the news
represents hope in this particular marketplace. Furthermore, HMRC has moved to ban
the use of credit cards for the payment of tax, which is supposedly aimed
at reducing credit dependency. However, there are still many who point to the
remarkable explosion of the credit bubble in the UK alone, with some pointing
at recent figures which suggested that, as according to the Office of National
Statistics, the bubble now stands at £392
billion and counting, with the additional warning that household debt could
go past £20,000 by the end of this current Parliament. It is this type of statistic
that correctly frames the results of a recent study by employees at the BoE –
although not acting in that capacity – which suggests that nearly 90%
of all outstanding credit is held by those who were also in debt two years
earlier; the inference, quite clearly, is that these people are trapped in
the credit cycle, and despite being able to transfer balances remain within the
cycle.

The media was quick to pick up on the fact that of those in
debt, the spike is not down to excessively risky borrowers – i.e. ‘sub-prime’
borrowers, but there was an acknowledgement that the stagnation
in real earnings was having the obvious effect of keeping people within the
credit cycle. One argument is that the time of year is having a disproportionate
effect, with figures released recently that suggest that around 7.9
million Britons are likely to fall behind with their finances on account of
spending in the run up to the Christmas period and, across the board and not including
mortgage repayments, the average
Briton now owes over £8,000. Yet, it is very easy to get lost or misguided
by the semantics being used within the common narrative.

There has been plenty of talk about ‘credit
binges’ and all the seasonal data referenced above points towards the
problem of stagnation in terms of real income affecting people’s sensitivities
to what they perceive as their ‘standard of living’; the inference being that
people have become accustomed to a certain way of living and have not adjusted
their budgets accordingly in the downturn. However, other figures suggest that
this Conservative narrative portrays a reality that is little more than a
falsehood, because last year there were record
numbers using food banks, to use just one example. The obvious
counter-argument is that not all of those using food banks account for all of
those in debt, which is correct, but the reality of the situation is that more
people than ever – in the modern era – are operating just above, or in many
cases below, the so-called ‘breadline’. What this describes for us is the
understanding that the so-called ‘average’ person is struggling to cope with
the onslaught since the Crisis and, even a decade on, one of the largest
instances of wealth extraction continues to significantly
and negatively affect the poorer classes specifically. This reality is not
that one that has been dreamed up by this author, but in fact comes from the
mouth of the new Secretary for Work and Pensions in the U.K., Esther McVey.
McVey, speaking just a few years ago, stating quite boldly that ‘in
the U.K., it is right that more people are… going to food banks because as
times are tough, we are all having to pay back this £1.5 trillion debt
personally…’ which should, of course, remind of us of the equally
remarkable comments
made by Jacob Rees-Mogg. Whilst the wealth of the current cabinet has not
been calculated yet, on account of it only reforming over the past few days, it
is safe to say that it is comprised
only, if not majoritively, of millionaires which leaves us with the
disgusting reality, once again, of millionaires telling the public that it is
right that they struggle even though the effect of systemic wealth extraction
has damaged them disproportionately.
McVey’s appointment is the latest in a long and continuing line of events that
confirms that, for those suffering, the end is not in sight. With people
trapped within the credit cycle, and many others forced to use food banks,
despite often holding employment, the reality of the situation is that the people
who can affect real change not only will not do so, but believe it is ‘right’
that this imbalance both exists and continues. Whilst many news stories impact
society, it is the financial news which, arguably, presents the reality of the
situation, if deciphered correctly – deciphering this current batch of
financial news makes for depressing reading, unfortunately.

Sunday, 7 January 2018

Today’s post reacts to the news that broke this evening
concerning the massive accountancy (and advisory) firm KPMG’s withdrawal from
the inquiry into the Grenfell Tower fire that occurred last June. Whilst this
post will not discuss the Grenfell Tower disaster in any great detail – mostly because
it is an extremely emotive subject but also because the Inquiry still has some
way to go before concluding – it is worthwhile looking at two specific
instances: the most important is to look at why KPMG today released a statement
that it had ‘mutually
agreed with the inquiry that we will step down from our role with immediate
effect’, but it is also worth asking why KPMG was considered an appropriate
source of advice in the first place – does the firm’s track record,
particularly in the modern era, reveal for us the processes underpinning this
most important of inquiries?

KPMG is one constituent part of the so-called ‘Big Four’ –
the oligopolistic partners within the accounting industry – and its history is
a long and storied one. Consisting of a merger
between four different firms (with the oldest dating back to 1870 with
William Barclay Peat and Co) that
took place in 1987, the firm has catapulted itself to a position of genuine
influence within the modern economy. However, that propulsion has with it a
number of associated instances, with a number standing out. Using the turn of
the century as a good starting point in relation to the behaviour within the
accounting industry, KPMG’s transgressions, arguably, went under the radar
whilst its then-competitor Arthur Andersen was publically
decimated for its role in the Enron Scandal; whilst the fall of Arthur
Andersen is oft cited, KMPG’s ‘deferred prosecution agreement’ with the U.S.
Department of Justice (DoJ) for $456 million (plus $225 million in private
settlements) is rarely mentioned, as is the sentences handed to a number of
senior KMPG officials for their role in the providing of ‘tax shelters’ which
allowed the wealthy to avoid
paying billions in tax contributions. That particular era was to be
followed with another phase in which the accounting industry (particularly the ‘Big
Four’ would transgress en masse whilst other financial service providers would
be publically shamed; the Financial Crisis. Whilst big banks, credit rating
agencies, mortgage providers and insurers would correctly see themselves
publically identified and vilified for their roles in one of the largest
instances of ‘wealth extraction’ to have ever been witnessed, the ‘Big Four’
would see their transgressions, again, go somewhat under the radar. During the
lead-up to the Crisis, the large mortgage financiers and big banks did indeed
partake in what was nothing other than systemic fraud, and credit rating
agencies negligently provided their assurances to the overly-risky products
that were at the centre of the impending crisis (and the insurance industry
allowed for secondary markets and so on and so on), but a fact that was not
given the right amount of attention was that for all of these financial juggernauts
the requirement to have their balance sheets checked by independent and
thorough third-parties remained – and this is where the accounting firms’ transgressions
play their part, although
the lack of ‘coverage’ would have one thinking differently if one did not
appreciate the ‘culture’ within the largest financial firms. More recently, we
looked at the continuing fines being handed to the ‘Big Four’, with KPMG
being fined recently by the U.S. Securities and Exchange Commission (SEC) for
mis-advising consumers in the favour of big business, which is a common theme
within industries that offer advisory services for a high price (even the briefest
of analyses of the Big Four’s financial statements reveal that advisory
services make up a significant proportion of their income, and with that comes
unique pressures that affect the role and purpose of an auditor). There have
been a number of other
instances along the way and there will undoubtedly be many more, but on the
back of this admittedly brief review of just some of the industry’s
transgressions, we will now review the details of the firm’s connection to the
Grenfell Tower Inquiry.

The particular details of the case are currently being played
out across the media, so for our purposes it will probably be best to be as
simple as possible. Officially, the story goes that KPMG were appointed to
advise on the structuring of a project management office for the Inquiry, with
KPMG declaring that ‘our
role was purely operational and advised on project management best practice and
had no role advising on the substance of the inquiry’. However, a concerted
campaign was initiated in response to the reality that there were likely a
number of conflicts of interests present within the relationship; the campaign culminated
in an ‘open letter’ being sent to the Prime Ministers from campaigners,
academics, and MPs declaring their belief that KPMG was too conflicted to
provide independent advice to the Inquiry, and the details of the campaigners’
claim deserve to be looked at. Most glaringly, the auditor that was hired to
provide assistance to the Inquiry is, inexplicably, the same firm that audits
the parent company of Celotex, the firm that produced the insulation for
Grenfell Tower which has, to this point at least, been identified as a key
component in the disaster, as well as auditing the Royal Borough of Kensington
and Chelsea and Rydon Group, the firm
contracted to refurbish the Tower. This intertwining of the auditor in the
business of three entities that had a massive role in the disaster should have
prevented the firm even being considered for the role of advisor to the
Inquiry, but is this the case in reality?

MPs and Campaigners have greeted KPMG’s decision to withdraw
from the arrangement with a small amount of pleasure (relatively speaking), but
have been quick to note that the inference of this sequence of events is a
negative one; one campaigner noted that ‘this
appointment was yet another example of the government’s deafness to local needs’,
which is absolutely correct. However, here in Financial Regulation Matters we are consistently looking to analyse
the inference as well as what is
stated and, rather unfortunately, this chain of events can be seen to
illustrate something which is particularly tragic, but illuminative of the
society we currently inhabit. Yes the Inquiry is extremely important, but the
reality of the situation, when articulated, makes for tragic reading. The first
instance to note was the Government’s, and particularly Theresa May’s,
absolutely abysmal handling of the aftermath of the disaster, which came
complete with a number of broken promises like the fitting of sprinkler systems
to similar residences (something which the Prime Minister would later say could
not be afforded). However, even more devastatingly, at the time of writing
residents of Grenfell Tower have still not been rehomed, which has led to a
string of criticism but still very little action from the Government; David
Lammy MP, one of the most vocal critics of the Government’s handling of the
disaster, is clear in his understanding that there is a chasm
between the citizen and their representatives in this, and many other
circumstances; perhaps, as Lammy notes, that may indeed be at the core of the
problem. Theresa May was asked in the House of Commons how safe
she would feel living on the 20th floor of a large Tower Block with
no sprinkler system and erroneous safety advice (and inadequate cladding
and insulation and so on and so on) and the simple answer to that poignant
question is that she simply will never experience that scenario – so, how
representative can she really be? What she, and the Government moreover do
understand however is business, and the protection of big business to be
precise. Yet, it is too easy to suggest that KPMG was allowed to advise the
Inquiry because of its ashamedly pro-business culture, because in reality what
we are witnessing in this scenario is just the latest in a long line of
division that underpins most of modern society (particularly in the U.K.) – the
people who tragically perished in Grenfell Tower were, by and large, poor people, and overlooking that fact
is, and always will be a tremendous error. The cladding that was attached to
the building, the cladding which allowed for the fire to spread at an alarming
and debilitating rate, was erected to mask the aesthetics for those who owned
homes in the much richer parts of that particular borough. The companies which
were contracted to carry out significant and important work on the building are
owned by wealthy individuals. Now, the Inquiry that has been set up to,
seemingly, provide answers to the public as to the events that led to that
horrific sight of a large building being gutted by fire with its occupants
trapped, is being advised by a company that all the other companies pay for
services on a number of other occasions. It is easy to dismiss this connection
as being demonstrative of a larger and more brutal reality, but it is vital
that we seek to assess situations within this particular paradigm; if the
scenario does not fit the paradigm then that is great, but the incredible
amount of times that it is does presents an awful reality in which the poor are
being consistently abused, and without any conceivable recourse. The actions of
the campaigners who highlighted these conflicts and brought about KMPG’s
withdrawal is just one heroic action in a long list of heroic actions that have
followed the disaster as many attempt to seek justice for those who were
tragically killed last year – that they have to do so much to get justice is,
perhaps, illustrative of the real problem we face.

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.